Central banks have been buying bullion at a record clip because holding dollars has become a losing proposition
In the German writer Ernst Junger’s macabre vignette ‘Violet Endives’, a man walks into a gourmet shop where the salesman speaks in matter-of-fact fashion about the delicacies on display – human flesh – and embarks upon a long explanation about the art of preparation. The story is a commentary on a society that accepts the appalling with barely the blink of an eye.
Far less ghastly but displaying a similar business-as-usual spirit has been the establishment reaction to the massive surge in gold prices in the last couple of years. Gold prices have exploded higher of late but there are an awful lot of people trying hard not to notice this disconcerting trend; if noticing can’t be avoided, they try not to think much about why.
What the financial and political establishment resolutely do not want to see is the deeper restructuring of reserves taking place in light of the debasement of the dollar.
Prices are soaring
In just a decade, gold has gone from around $1,000 per ounce to over $4,800 as of this week. In 2025 alone, gold added nearly 70% – despite relatively high interest rates (high rates usually push investors out of non-yielding gold). This is a huge flashing red light indicating something has broken deep in the bowels of the current monetary system.
Yet the financial and political establishment pretends that it isn’t human flesh, so to speak, carved up on platters in the display case.
“Prices are expected to push toward $5,000/oz by the fourth quarter of 2026, with $6,000/oz a possibility longer term,” JPMorgan wrote in late December in an end-of-year research note that used boilerplate language and analyst jargon in order to massively understate what is actually an extraordinary phenomenon. We’re not even through January and gold has already blown through most of JPMorgan’s full-year upside.
There are many factors unnerving investors at the moment: Japan’s shaky bond market, the fraught geopolitical backdrop, and the general sense that the threads holding the world together are coming unraveled at an accelerating pace. Now, the ‘debasement trade’ – a belief that excessive debt and deficits are eroding the value of fiscal currencies – is making headlines. This profoundly underappreciated aspect strikes close to the truth. The gold price couldn’t have quadrupled in a decade and more than doubled in just two years on sentiment alone.
Central banks are the true driver
The structural driver of the vertiginous rise of gold is that central banks have been fork-lifting the metal by the palette into their vaults. Early last year, I wrote about how this trend was ushering in a change in pricing power in the market. Whereas the gold market was previously dominated by Western institutional investors – who mostly bet on gold as a proxy for expected interest-rate moves – pricing is now being dictated outside of Wall Street as price-insensitive central banks load up on the metal.
The main buyer has been China, but India, Türkiye, Brazil, and Poland have also been notable. Notice also that only one of those countries is fully in the Western orbit. But pretty much everyone else wants in on the action too. According to the World Gold Council’s 2025 survey, 95% of central banks anticipate an increase in global gold reserves over the next 12 months.
Gold is now the fastest-rising international reserve asset – largely to the detriment of the dollar. It is estimated to have reached 30% of total central-bank reserves as of late 2025. What’s more, actual gold holdings are likely significantly understated. What many don’t realize is that gold can move between governments without any disclosures. The main source of official information about each country’s gold holdings is what countries self-report to the IMF. Never an exact science, these figures may not even be ballpark-worthy anymore.
Many governments buy gold through non-central bank entities for plausible deniability. There are, for example, numerous Chinese entities that report directly to the People’s Bank of China that can buy gold – but not have it be reported to the IMF.
These opaque volumes are not just a few tons whisked around on the sly. The World Gold Council estimated in 2024 that around two-thirds of official-sector gold demand is now unreported. Analysts cited by the Financial Times believe, for example, that China’s unreported gold purchases could be more than ten times its official figures as it quietly diversifies away from the dollar. Gold analyst Jan Nieuwenhuijs calls these covert gold purchases a sort of “hidden dedollarization.”
Looking beyond the dollar
Let’s linger for a moment on this idea. Imagine the dollar system as three concentric circles. The first and most visible is transactions (trade invoicing, settlement, cross-border payments); the second is funding/credit (dollar-denominated debt, global banking system); the third, inner circle is reserves/stores of value (central bank reserves, sovereign wealth, strategic assets).
Anyone looking only at the first two circles could be excused for dismissing dedollarization as a marginal phenomenon. In 2022, for example, BIS data shows the dollar was involved in 88% of foreign-exchange trades globally, already close to a record high. In 2024, this figure was estimated to have actually slightly risen to 89%. The yuan was at 7% in 2022 and inched up to 8.5% in 2024 – hardly a pace that would threaten the dollar. Foreign currency debt issuance paints a similar picture of a stable dollar share. The dollar’s centrality to the global banking system remains in place.
But it is this third category (reserves/stores of value) where the action is happening. There is of course a big chicken-or-egg question about which of these circles anticipates change in the others. Do countries inevitably start trying to hold as reserve assets the currencies they transact most in/borrow in or do transactions end up reflecting the currencies countries hold?
There is good reason to believe that what is now happening in the third category will eventually be reflected in the other two. This does not, of course, mean trade will be settled directly in physical gold. Rather, we will see a much more decentralized settlement system (involving a neutral reserve asset and more local currencies), possibly with central banks netting out trade surpluses using gold. Think of this as tectonic pressure under a mountain range: The movement starts deep underground, but the surface topography shifts only much later.
The tectonic pressure in this case is that holding dollars is now a losing proposition. This is the case not only because the greenback has become a bludgeon for subduing Washington’s adversaries (real and imagined), but because it is simply a bad investment. The US has absolutely no credible path to getting a grip on its spiraling debt and isn’t making the slightest effort to chart one, so it will almost certainly have to run negative real rates (interest rates below inflation levels) in order to erode the burden of its enormous debt over time. That’s pure erosion.
The only other option is to let rates remain high and then suffocate under a higher debt-servicing bill – while also inviting a credit crisis. Faced with a choice between a quick death and a slow death, governments tend to choose the latter. The recent behavior of the Federal Reserve gives no reason to believe the debasement of the dollar won’t continue.
This means the actual purchasing power of the dollar assets held by central banks across the globe is decreasing and will further decrease. It’s bad enough to have to worry about the capricious nature of US foreign policy, but to also slowly go broke by holding dollars is too much to ask of most of the world (except perhaps Western Europe). This will lead (or already is leading) certain large countries to seek to price key goods such as commodities in their own currencies, thus pushing the first two circles to where the third is already moving – i.e. away from the dollar. China is ahead of the curve on this.
This is where we come back to the debasement trade mentioned at the outset. This is what is driving much of the more immediate price movement. The debasement of the dollar is the underlying condition, central-bank buying the response to that condition – and now the piling-on has begun. Quite simply, investors who understand this logic are trading it. Many large investors have clearly sniffed it out.
Ignoring the elephant in the vaults
Meanwhile, a state of denial prevails in the US establishment about the slipping status of the dollar. The Fed’s ‘The International Role of the U.S. Dollar – 2025 Edition’ boasts that the dollar represented “58% of disclosed global official foreign reserves in 2024 and far surpassed all other currencies.” Nevertheless, it admits, “central banks can hold gold as an alternative to foreign exchange reserves,” adding that the “share of gold in official reserve assets has more than doubled from below 10% in 2015 to over 23% now.” However, the Fed assures dryly that “this increase mostly reflects the over 200% increase in the gold price over that period.”
No mention of the now widely acknowledged practice of off-the-books gold purchases; no attempt to reckon with calculations of actual central-bank holdings as estimated by respected analytical houses; and, most unusual of all for an institution as sophisticated as the Fed, no curiosity about what drove the more than 200% increase in the gold price over that period. Gold just happened to tick 200% higher? Just the odd portfolio re-allocation here and there?
Treasury Secretary Scott Bessent gave a further hint of establishment thinking in an interview with Tucker Carlson on April 7 of last year, just a few days after President Donald Trump’s ill-fated Liberation Day tariffs were introduced. The Treasury boss admitted that there is huge demand for gold in China, but explained it as follows: “[China] is in the middle of an economic recession slash depression, people don’t trust the Chinese currency, because they have capital controls; there are 1.4 billion Chinese who all want to get their money out, and [the government] won’t let them; they will let them buy gold.”
China is in a depression and nobody noticed! The 1.4 billion-strong population of China would like nothing more than to put their money in dollars, but, denied such an opportunity, they buy gold instead! The rise in gold apparently has nothing to do with erosion of the dollar’s value or credibility but is all about Chinese dysfunction!
Contra Bessent, analysts such as Nieuwenhuijs argue that only a minority of China’s gold imports can be explained by retail demand, while the bulk is absorbed by sovereign or quasi-sovereign entities.
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The chaotic dismantling of the Bretton Woods system in the 1970s led to gold having been removed to the margins of the system and it was the Americans’ intent for it to stay there. In 1975, US President Gerald Ford told German Finance Minister Helmut Schmidt that “we… feel strongly that some safeguards are necessary to ensure that a tendency does not develop to place gold back in the center of the system.” No subsequent US presidential administration has budged from that position.
Of course, the fact that gold was exiled from the heart of the financial system and turned recast as a toothless proxy for interest rates in the first place was a great coup – prepared by the US political establishment and engineered by Wall Street.
But gold is indeed making a return to the center of the system. It is entirely appropriate that not only is a new monetary system being forged in which bullion will have a place of honor, this is happening via means unintelligible to the West – not through loud media campaigns, triumphant proclamations, or bullying, but as a quiet and patient restructuring of the entire foundation.